Tuesday, February 16, 2010

Greece and Ethics***

Although I like Felix Salmon, I often suspect he's being contrarian for the sake of being contrarian. Recently, this has led him to defend Goldman Sachs on a number of fronts, including its role in the Greece debt crisis:


So while it’s entirely fair to blame Greece for trying to hide its debt, and to blame Eurostat for letting it do so, I think that blaming Goldman is harder. It was surely not the only bank involved in these transactions, and the swaps were simple enough to be shopped around a few different banks to see which one could provide the best deal. Structuring swaps transactions is one of those things which investment banks do. If countries like Greece buy swaps in order to hide their true fiscal status, then that’s the country’s fault, not the banks’. No self-respecting bank would decline such a transaction because they felt it was unfair to Eurostat.
Yes, I’m sure that Goldman put a team of people onto the Eurostat rules and made that team available to the Greeks. But let’s not blame the advisers here, for structuring something entirely legal and which the Greeks and Italians clearly wanted to be able to do all along. This is a failure of European transparency and coordination; Goldman is a scapegoat.

Sure, what Goldman did was technically legal, but does that make it right? Investment banking ethics is a bit of an oxymoron, so I'd expect to hear that reasoning from Goldman, but it's unfortunate that Salmon chooses to rationalize it this way, too. Would he also approve the work of people like Maurice Levy*?

* Obligatory watch-the-Wire-if-you-haven't-seen-it aside. Not going to waste much effort on it, though, because if you haven't seen it yet, I'm not sure how I'm going to persuade you.

Excuses such as this further entrench the inappropriate business practices of  investment banks into the financial system. They encourage the development of a system where the way to make money isn't developing deals that benefit all stakeholders, but rather tricking regulators and investors by bending the technical definitions of the law**. With the prominence of this sort of behavior on Wall Street, I'm unsure how much increased regulation and new laws can help--banks and lawyers will only make more money figuring out new ways to evade them. And bloggers for major financial publications, apparently, will continue to support their right to do it.

** Again, I must turn to my familiar rallying cry and ask if we would allow this sort of behavior in any other industry. I'm pretty sure we hold even used-car salesman to a higher standard.

*** I'm sure someone with a background in philosophy (Shaun) could write an entire book on the actual "ethics" of this, but I think you understand the point I'm trying to get it and the definition of ethics I'm using.

5 comments:

Rob said...

Would he also approve the work of people like Maurice Levy*?

It was always clear that Levy was breaking the law, and knowingly doing so. He went to considerable efforts to cover it up, which is why he never (really) suffered as a consequence, but that's not the same as being 'technically legal'.

Goldman's, on the other hand, didn't knowingly break any laws (or un-knowingly break any laws, for that matter). Yes, that's a pretty low moral standard to hold them to, but it's a fairly important one.

In deals like this, my intuition would be that it's fair of Goldman's to assume that the Greek government a) knows what it's doing, b) knows that it's legal and c) believes that their actions are in the long-run best interests of Greece. None of these are necessarily false; we don't know what the counter-factual would have been if the deals had not been done. Perhaps the Greek govt. thought that they were buying themselves time to restructure and thought that a little subterfuge would be justified by the ends. In retrospect this turned out to be true, but would this have been obvious at the time and should Goldman's have chosen to frustrate the aims of the Greek government in the name of morality?

Rob said...

Whoops. My final sentence should have begun "In retrospect this turned out to be false".

Jack said...

Rob:

Thanks for reading and thanks for the comment. I think you raise some interesting points. My quick response:

"It was always clear that Levy was breaking the law, and knowingly doing so. He went to considerable efforts to cover it up, which is why he never (really) suffered as a consequence, but that's not the same as being 'technically legal'."

A good point. Stuff like getting grand jury testimonies was definitely illegal, which is certainly different. I guess I was comparing it more to his actions in helping the drug dealers cover-up the money deal. It's less likely that any of that stuff was actually illegal, but certainly, it's not right.

"In deals like this, my intuition would be that it's fair of Goldman's to assume that the Greek government a) knows what it's doing, b) knows that it's legal and c) believes that their actions are in the long-run best interests of Greece."

I guess this is where we differ. I think it should be Goldman's (or any other investment banks) responsibility to advise Greece--not merely help them achieve something that's technically legal. After all, it's the banks and not the governments that are supposed to be the experts. I realize that's not how the system currently works, but, in the ideal world, maybe it should work that way.

"...but would this have been obvious at the time and should Goldman's have chosen to frustrate the aims of the Greek government in the name of morality?"

Again, in a better world, we might have investment banks that would indeed stop a government from doing something like this in the name of morality. Or at least Goldman could have declined to do it when Greece came to them and asked for help--they didn't actually have to take action to stop them.

Tim Worstall said...

"After all, it's the banks and not the governments that are supposed to be the experts."

I really, really, don't think you mean that. For if the banks are the experts then the government should simply do what the banks, the experts, tell them. Which rather knocks down the idea of any regulatory or legal oversight of the banking system by the governments.

The logical end of your statement is "You, the banks, must obey us, the governments, because we're idiots and don't know what we're doing".

Now much as I personally believe in hte idiocy of governments I don't think that's quite the point you were trying to get across.

Jack said...

Tim:

Thanks for the comment.

Like you might imagine, what you said is not what I wanted to get across. I don't think what you said actually is the logical end of my statement; by saying the banks are the experts I was merely saying they should provide some advice because they're interacting in these markets every day, not just blindly follow what the client tells them to do--The government doesn't have to listen to them. Rob seemed to be saying that even if the bank thought it was a dumb idea it should help the government do it. In a perfect world, the bank would have the client's interests in mind and might give some caution to this idea.

Second, I certainly don't think structuring a deal and regulation are analogous and my deference to banks as experts on the former would certainly not mean deference to them about the latter. As I've said before, banking professionals that work in these markets every day are going to have a much better idea of how to structure a swap like this. That does not necessarily mean they can see the bigger picture and are experts about what regulatory schemes are better than the government. Even if I were to trust them to do a specific deal because they're experts (and, in the less-than-perfect world we live in, I would be skeptical), I wouldn't trust them to regulate just because they're experts (to compare to sports, just because you're a great hitter doesn't mean you're a great baseball strategist). I don't think suggesting they're "experts" in one small sense leads to the conclusion that the government should just listen to them about everything.